1. What does all the terminology mean?

– The debt is like a bank loan that keeps growing at the end of every financial year when the overdraft is rolled into it.

– Revenue is what the government collects as tax.

– Spending comes in two parts: predictable – on departments like defence, aid and the NHS, and unpredictable – when it comes to welfare.

– The “structural deficit” is the overdraft calculated as if short-term fluctuations and long-term investments don’t exist, and is a better measure of the health of the government finances.

– The output gap is the gap between growth now and the economy’s maximum ability to grow. If you have a big output gap you can expect more growth as the recovery improves.

– The coalition’s fiscal targets are: the books must be forecast to be balanced over a five year period; and debt has to be falling as a share of national income by 2015/16.

2. What’s the problem?

– After the financial crisis of 2008 the government had to spend massively more than it was taking in taxes. So both the deficit and the debt ballooned.

– At the 2010 election the argument was over how fast to cut the debt and deficit. George Osborne said he would cut it faster, effectively slashing the structural deficit (see above) to zero by next May. Labour said they should cut more slowly because rapid austerity risked tanking the economy.

– The economy did indeed flatline and it was only in 2012/13 that growth began to recover. The government’s budget watchdog, the Office for BudgetResponsibility (OBR), said the economy had permanently lost some of its ability to grow, and the output gap was small (see above).

– So Osborne has had to repeatedly extend the time-period of austerity and push back the main target, again and again, extending the period of austerity into 2018/19.

– Now we’re growing, but tax receipts are not rising as fast as expected.

3. What to look for?

– Many of George Osborne’s options are limited by how the OBR “reads” the economic tea leaves. It might decide growth is slowing in the wider world; it might say tax receipts will fall because the price of oil is falling.

– On the other hand the OBR has been wrong about how quickly the economy is recovering – suggesting it may be too pessimistic about future growth. If so, it could recalculate the output gap (see above), saying there’s more flexibility for the next government in how it gets borrowing down.

4. What are the options

– Labour agrees with the coalition parties about the overall spending limits for the next two years. But it disagrees over what to spend money on and who to tax.

– The coalition’s current plan is to slash an extra £12bn a year from welfare spending, £2bn by freezing in-work benefits like working families credit, and to give away tax by increasing the 40p threshold to £50k and raising the point where you start paying tax to £12,500.

– Labour wants to abolish the “bedroom tax”, freeze business rates for small/medium businesses, and give the NHS an extra £2.5bn.

– But Labour’s long-term austerity plan is softer than the Tories’ by between £15bn and £20bn – because they’ve given themselves more room for manoeuvre.

5. What if growth is projected to slow and the deficit is predicted to grow again?

– That’s why Wednesday 3 December is important.

– One of the big issues is the kind of growth we’re enjoying during the recovery. We’ve created a lot of low-paid jobs. These don’t raise much tax, and they don’t boost productivity. So even with the number of hours per week worked back on track to where it was before the crisis five years ago, tax receipts are falling behind what’s expected.

– If the OBR takes a pessimistic view of both global growth and tax receipts that could blow any realistic idea of getting either the deficit to zero on any measure.

6. What aren’t they telling us?

– The coalition is committed to extra cuts, but has not explained where they would fall. Much of their future cuts plan revolves around lower welfare spending – but the universal credit is massively delayed and over budget.

– The Conservatives’ policy – as a party, not government – is to cut even faster than the current plan, but again not much detail.

– Likewise Labour has not detailed the extra cuts it will make to get the books balanced, only the spending it will ringfence.

7. What to listen for?

– Do they try and say they’ve met their target, even though borrowing is off course, by recalculating growth?

– Do they announce any detail about already planned cuts?

– Do they announce any new spending cuts on top of what’s planned?

– Do they revise the size of the output gap?

8. Is there a doom scenario nobody wants to talk about?

– Yes: global growth stagnates, the Eurozone stagnates – and the European Central Bank fails to make good on its promise to print money, and then collapsing oil prices take UK inflation negative. That’s good for workers, because real wages could rise for a bit, but bad for the debt and deficit because deflation makes them bigger without anybody even having to try.

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One reader comment

Adriansays:

Paul is spot on here with a useful explanation and the background. However, I’m not sure I buy deflation (inflation negative) as being good for workers. History tells us that deflation is the most dangerous step towards slump, mass unemployment and repression. If we all think goods are going to be cheaper tomorrow nobody buys, employers crash and people are thrown out of work with no market mechanism to bring the situation under control. Also, with interest rates on the floor monetary policy is useless. As Lenin once said, ” What is to be done?”